What is a Sole Trader
From the word itself, a sole trader is someone who operates a business as an individual. When you are a sole trader, you and your business are one – there is no legal distinction between you, as the owner, and the business.
Definition of a Sole Trader
Being a sole trader means that you are responsible for:
- any losses your business suffers
- all of your business’ payables
- diligently keeping track of your business’ income and expenses
A Sole Trader’s Tax Responsibilities
In terms of complying with HMRC, sole traders are required to:
- accomplish a Self-Assessment tax return every single year
- maintain a record of the business’ income and expenses
- make sure Income Tax and National Insurance on profits the business earns are paid
- complete VAT registration (provided that takings exceed the VAT threshold)
- keep digital copies of records in response to HMRC’s Making Tax Digital program
If a sole trader fails to accomplish the above-mentioned responsibilities, he may be fined, similar to what is done to limited companies that do not oblige.
The Advantages of Being a Sole Trader
There are advantages to being a sole trader, the reason why many freelancers choose to start with this business setup. These advantages include a fairly easy startup process, minimal administrative tasks, and lower startup and long-term costs.
Starting Out as a Sole Trader
Anyone can start as a sole trader by following these three easy steps:
- Inform HMRC of your self-employment
- Register for Self-Assessment as a Sole Trader
- Choose a name for your business
After completing other licenses that may be required by their industry, sole traders may immediately start trading. A business operated by a sole trader is technically not considered a company and is, therefore, not required to register with Companies House.
Naming Your Sole Trader Business
As your business name will appear on invoices or other official documents, it is important for it to represent you well. Hence, business names of solo traders must abide by the following rules:
- The business name must not include the following words, phrases, or abbreviations or acronyms: “limited”, “Ltd”, “limited liability partnership”, “LLP”, “public limited company”, or “plc”.
- The business name must not sound or be foul or offensive.
- The business name must not be identical to an already existing trademark.
Apart from the rules above, there are “sensitive” words and expressions that are not allowed to be part of the business name. Any name that associates your business with a government agency or local authority, especially without any permission is also prohibited. To check the list of “sensitive” words forbidden by law, you may access Gov.uk.
Advantage 1: Having Less Administrative Tasks
Operating a business as a sole trader is much easier than running a limited company. You will be able to do away with time-consuming administrative tasks such as records keeping and other paperwork like annual accounts and corporation tax returns. You will only mostly be required to work on closely monitoring your sales and expenses and making sure you submit a Self-Assessment and, in some cases, a VAT return.
Since a business run by a sole trader is not a company, there is no need to register with Companies House, nor file forms in case of changes in management or directorial positions, or if there is an allotment of new shares. Maintaining a list of statutory registers and submitting an IR35 are also not part of a sole trader’s obligations. There are certain responsibilities that sole traders are exempted from simply because they are not running a company. This means that sole traders will have more time focusing on how to grow their income instead of spending countless hours doing paperwork.
Advantage 2: Saving on Costs
Setting up as a sole trader allows you to save on professional fees because there won’t be a need to hire a company formation agent (usually needed when setting up limited companies) or a solicitor. Even accounting services are not compulsory until the need to file statutory documents and accounts reporting arise. Since the accounting workload is not as hectic as in company setups, accountancy costs are also not as high. As was previously mentioned, a sole trader’s business is not a company, so, registration with Companies House is not required, allowing the sole trader to save at least £13 on registration fee.
Advantage 3: Having More Privacy
Companies House keeps a record of limited companies’ details and accounts and makes them available online for public inspection. This means that competitors have access to company information, making it easy for them to contend with their business. Sole traders are spared from this because they are protected by HMRC’s taxpayer privacy policies. In other words, competition is not really a problem for sole traders because their information are kept confidential.
Easier setup process, more privacy, and less administrative burdens are only a few of the advantages of setting up as a sole trader. Sole traders also end up with more flexibility because there is no need for consultations with other business partners. However, it is still best to see where you stand and clearly define your goals and priorities in order to determine the right business structure to apply.
Advantage 4: Being in Control of Your Own Business
Having the freedom to make decisions and having complete control over your business is probably the best takeaway from being a sole trader. Unlike in other business structures where the course usually depends on the decision of shareholders, a sole trader only has himself, and probably an accountant, to consult in terms of making choices for the business. Profits are also solely yours to enjoy, too.
The Disadvantages of Being a Sole Trader
If there are advantages, so must there also be disadvantages. In the case of sole traders, this translates to unlimited liability. This means that if your business fails or suffers losses, creditors could take away your personal belongings and other properties. This is because a sole trader and his business are treated as one. If a business incurs debts, it is the responsibility of the sole trader to settle whatever amount is owed.
Another drawback to running a business as a sole trader is tax inefficiency. However, this can easily be assuaged by converting into a limited company once the business stabilises and a set earning standard has been met. This will allow you to make the most of your profits.
Some creditors and business magnates have a tendency to become more skeptical when they do business with sole traders. But if you incorporate, there is a greater potential to have more borrowing power and even have better employment opportunities.
Because of these disadvantages, operating as a sole trader is often recommended for those who are new to the freelancing business. Once they have learned the tricks of the trade, they can then start venturing into running limited companies. Speaking to an accountant will help you decide if you’re ready to go limited.
Is being a sole trader right for my business?
Because being a sole trader has both advantages and disadvantages, going for this kind of business structure will depend on several considerations. You may refer to our article on the pros and cons of running a limited company, an umbrella company, and operating as a sole trader. You may also seek personal advice from an accountant who can help assess your capabilities and make recommendations. If you need further assistance, you may book a free consultation with our dedicated financial advisers by calling 0161 804 0808. They can guide you through the decision process, get you oriented with different business models, and help you determine the best business structure for you.